Choosing the Right IRA

An IRA (Individual Retirement Account) offers an individual a tax-free or tax deferred method of saving money toward his/her retirement. There are several types of IRAs and depending on the needs, goals, and financial situation of each person, the options vary. While Roth IRAs and traditional IRAs are among the most common, there are other options and choosing which would be most ideal for a person can be a bit of a challenge.

Traditional IRA

A traditional IRA provides a tax deductible solution in the form of contributions of no more than $4000 annually. For account holders who are over fifty years old, the amount allowed is usually greater. Whatever amount of money people contribute toward their IRA will automatically come off their total annual income, resulting in a lower amount of taxable income at the end of the year. With this being said, if money is withdrawn from a traditional IRA, the amount taken will be subject to normal income taxes as well as an extra 10 percent penalty for people who are under the age of 59.5. However, if the money is being used for something like buying a house or to pay for education, there may be an exception for in terms of the penalty. However, the standard income tax imposed by the IRS will still apply.

Roth IRA

In 1997 the Roth IRA was created with middle class Americans in mind. These IRAs are quite flexible in that they allow money to be withdrawn without penalty. In fact, after a period of five years, all money can be withdrawn from the account without being subject to taxes or penalties. The only money that will be taxed is the interest that was earned. Roth IRAs are not tax deductible and they may not be the best option for everyone. A person who files his/her taxes as “single” can be eligible for full contribution provided they do not make more than $95,000 annually, or $110,000 for partial contributions. For people filing as “joint” status, their earnings cap out at $150,000 for full contributions, and $160,000 for partial contributions. This means that anyone who is in a high income bracket, such as a corporate executive would not want to apply for a Roth IRA.

Rolling a 401K into an IRA

A very smarty thing for a person to do, who has left, or will be leaving a job at which they hold a 401k account is to roll his/her 401k into an IRA. Cashing out a 401k directly can cause a person to incur a hefty amount of taxes that will need to be paid. In order to avoid this taxation, a lot of people consult with financial planners to assist them in rolling their 401k accounts into either traditional IRAs or a Roth IRAs if all the qualifications are met. There are many tips online for people who are having trouble deciding what to do with their 401k accounts, as well as what sort of IRAs would be best for them.

Planning for retirement is one of the single most important things a person can do to help insure his/her future financial security. For this reason it is always best to weigh all options and examine each carefully when making decisions about any retirement accounts.